Home loans: hard to go past a fixed rate
Home loans: hard to go past a fixed rate – unless you’re cashed-up
CANSTAR releases annual Home Loan Star Ratings research, assessing 58 home loans across 10 providers.
With the official cash rate sitting at just 2.25% now is a fantastic time for New Zealanders to review their home loan to ensure that it's competitive. Research by canstar.co.nzhas found a 40 basis point difference between the minimum and maximum floating rates on its database and up to a 74 basis point difference between minimum and maximum fixed rates over a defined term.
|Table: Residential Home Loan Market - Snapshot of the current market (31/03/2016)|
|Floating||1 Year Fixed||2 Year Fixed||3 Year Fixed||4 Year Fixed||5 Year Fixed|
|Difference between min and max||0.40%||0.70%||0.74%||0.61%||0.46%||0.41%|
Source: canstar.co.nz. based on products on Canstar database for a $300,000 loan.
"Sometimes we can put home loan refinancing into the too-hard basket, but many borrowers might have more negotating power than they realise," said CANSTAR General Manager NZ – Jose George.
"The rate you can access will depend on the amount you are borrowing, the deposit amount you have available and your overall credit worthiness. It is certainly worth asking your bank the question though; on a $300,000 loan over 25 years, for example, even a 25 basis point reduction in interest rate could lower your monthly repayments by around $45 per month."
Fix or float?
It would appear that our major financial institutions are pricing in further reductions to the official cash rate, with the average fixed loan interest rates sitting significantly lower than the average floating rate.
"Based on average rates, floating interest rates would need to reduce by 0.98% and 0.73% before interest rates would be on par with current advertised 2 and 3 year fixed rates respectively," said Mr George.
."A fixed-rate loan certainly won't be for everyone, but the low fixed rates on offer certainly have the attention of would-be borrowers. In March, around 80% of the visitors to the canstar.co.nz home loan selector tables were looking for a fixed-rate loan, with the 2 year fixed rate, in particular, attracting almost a quarter of all searches," he said.
If you have cash to spare…
One advantage of a floating rate home loan is that, if you’re cashed-up, you might be able to utilise an offset account (a transaction account linked to your mortgage).
"Both of the floating rate home loan products that achieved a CANSTAR five star rating have the option of including an offset transaction account," said Mr George.
"The money sitting in an offset transaction account reduces the amount of home loan that you are charged interest on. So a large sum of money sitting in an offset account for a while can end up saving you a respectable amount."
As an example, CANSTAR has calculated the benefit of holding either $20,000 or $40,000 in a mortgage offset account for two years, against a $350,000 home loan, as follows:
|Table: Interest paid on a $350,000 loan over two years|
|Product||Interest Rate||Monthly Repayment||Amount Owing after two years||Interest Paid over two years|
|Floating with $20,000 in offset||5.62%||$2,013.69||$338,136.88||$36,465.51|
|Floating with $40,000 in offset||5.62%||$2,013.69||$335,763.55||$34,092.17|
"Offset accounts are far less common in New Zealand than they are in Australia, for example," said Mr George.
"For those that have cash though, an offset account can be a useful place to park it; the money effectively “earns” your mortgage rate in the form of reduced interest charges on your loan and because you’re not receiving that saving as income, it’s tax free."
Which lenders offer outstanding value?
CANSTAR's Home Loan Star Ratings, released today, compares 58 home loan products across five categories of floating, fixed rate and line of credit loans for both residential and investment purposes. The Star Rating Report is a useful way for mortgage holders to assess how their current lender compares, as well as to narrow down products worth investigating further. Products specific to certain groups or with restrictions on eligibility are not included in the ratings.
Link to Canstar’s home loan star ratings report: http://www.canstar.co.nz/star-ratings-reports/home-loans/
Five stars have been awarded to:
Residential Floating & Investment Floating
Residential Fixed & Investment Fixed
Line of Credit
Canstar congratulates all institutions on their achievement. More information about CANSTAR's ratings can be found here.